Stable yields of mature renewable technologies tempting new investor groups, but the technologies of tomorrow should not be overlooked.

While energy affordability is becoming a major political issue in the mature markets, the emerging markets are becoming increasingly attractive to renewable energy investors looking for stable policy environments according to EY’s latest quarterly Renewable energy country attractiveness index (RECAI) (pdf, 2.7mb), released today.

South Africa recently saw electricity from the country’s first solar power plant, the 75 MW Kalkbult solar PV power station, flow into the national grid. This plant is one of a number of private renewable energy plants the government supports to provide green electricity for the country and its commitment to combating climate change.

Norman Ndaba, EY Africa’s Power & Utilities sector Leader comments: “When looking at markets from an investment perspective, we’re seeing a gap developing in terms of attractiveness. On one side are countries that are in the process of reviewing, revising or rescheduling their energy policies, which is leading to uncertainty in the markets. On the other side countries are attracting investors by galvanizing large-scale deployment and removing barriers, as we’re seeing in emerging markets such as South Africa, Brazil, Kenya and Ghana.

“Governments must work harder to create stable markets in order to secure energy investment. The climate change talks currently taking place in Poland highlight the significant added value of renewable energy from economic, social, and environmental perspectives; which can only help to focus governments’ attention further.”

Renewable energy developers must weather the political storms

African governments are showing support in the development of the renewable energy sector through providing robust support framework to address the electricity demand on the continent.

South Africa, (ranks 20 in the Index), through its Department of Energy, has approved 17 new clean energy projects worth around ZAR33.8b (US$3.3b) in the third bidding round of its renewable energy independent power producer program. It received bids for 6,023MW of capacity and allocated 1,456MW, comprising seven wind projects, six solar projects (including two CSP facilities), one biomass and one landfill gas project.

Investment has also been taking place in other regions on the continent. In East Africa, Kenya (which entered the RECAI at 40th position, but expected to move ahead quickly in the next months) has robust support framework and significant potential to become a hub for renewable in the East Africa region is attracting project and deal activity to meet the surging electricity demand in the region. Ghana, in West Africa has also become one of the latest countries to adopt FITs for a range of renewable technologies attracting investment in the generation of electricity.

Norman comments: “The certainty in policy to drive the renewable energy sector has ensured that there are investment inflows into the sector from both governments and the private sector. South Africa’s Pension Investment Corporation, which invests on behalf of the Government Employees Pension Fund, announced in September that it would allocate ZAR2.3 billion (US$222m) to renewable energy as part of a broader infrastructure development program.”

The US remains in first place in the RECAI, which ranks countries on the attractiveness of their renewable energy investment and deployment opportunities, based on a number of macro, energy market and technology-specific indicators. However, while the US recently launched New York’s first green bank, to leverage at least US$1b in private investment for clean energy projects, concerns including the impact of shale prices on policy makers and a lack of long term energy policy may lead to renewable energy investor nervousness in the coming months.

Other markets experiencing delayed investment, abandoned projects and market exits due to political interventions include Australia, where the new government is drafting legislation to abolish the country’s carbon pricing mechanism in 2014. In Germany, which is placed third in the index, Chancellor Merkel is facing pressure from the energy sector to re-examine the renewable energy subsidies. Meanwhile in the UK, political point scoring on rising consumer energy bills only heightens uncertainty for investors. In Poland, a proposed switch from green certificates to competitive bidding has received mixed responses.

China continues to pursue its ambitious 2015 solar target of 35GW, with the introduction of solar tax breaks and subsidies and the implementation of specific measures to facilitate consolidation. Internationally, the EU’s decision to impose minimum pricing and quotas on Chinese solar equipment is expected to leave the European solar industry facing an uncertain two years ahead.

South America seeing healthy project pipelines to 2018

Looking outside the index’s top 10, South America continues to expand its presence in the renewables industry. In Brazil, 3GW of capacity has already been awarded in 2013 and almost 40GW of projects have registered for the November and December auctions. Chile continues to attract large-scale projects, including the world’s largest unsubsidized PV plant, while the government has officially doubled its target to 20% renewable electricity by 2025.

Markets such as Turkey and Thailand are also targeting renewables as a way to meet surging energy demand. Thailand’s government recently announced a 51% rise in its renewables target for 2021 to almost 14GW, or 25% of total electricity generation, up from 8% currently. High electricity market prices and a robust support framework in Turkey have resulted in significant oversubscription for its renewable energy auctions. While not in the index, Russia has seen a significant amount of activity in 2013 and if broad political and structural concerns can be overcome, the country could be a major force within the renewables industry in the next decade.

Renewable energy developers look for new investor options

Despite government intervention creating uncertainty in some markets, this year has seen resurgence in renewable energy initial public offerings (IPO), taking place at the fastest rate since 2010. The robust foundations underpinning the current surge in renewable energy “yieldco” IPOs – specifically, the promise of stable returns – indicates a potentially sustainable source of infrastructure financing. This is positive news for an industry still struggling to adapt to constrained balance sheets and scarce project financing.

Scarce project finance is also prompting renewable project developers to look for new investors with deep pockets and a long term outlook. Pension funds, managing approximately US$28t in assets globally, are becoming increasingly attracted to the long-term predictable yields offered by projects based on mature technologies such as solar PV and onshore wind. However, a recent EY survey highlights that more must be done to attract a bigger portion of the pension fund pot.

Looking ahead, Norman concludes: “Innovation remains critical to the renewable energy sector, from a technology and financing perspective. Political indecision and complacency over mature technologies could seriously hinder the evolution. However, while certain markets stumble, the future is looking very bright indeed for those markets which can deliver stable energy policy and investor confidence.”

Notes to Editors About the RECAI

The RECAI report ranks its 40 entries on the attractiveness of their renewable energy investment and deployment opportunities, based on a number of macro, energy market and technology-specific indicators.

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